NIIT Learning Systems Ltd. (NSE: NIITMTS) Q2 2025 Earnings Call dated Oct. 23, 2024
Corporate Participants:
Vijay Thadani — Vice Chairman and Managing Director
Sapnesh Lalla — Chief Executive Officer and Executive Director
Analysts:
Pranay Roop Chatterjee — Analyst
Siddhant Dand — Analyst
Jinal Seth — Analyst
Ganesh Shetty — Analyst
Raaj — Analyst
Vimal Gohil — Analyst
Pratap Maliwal — Analyst
Ankur Shah — Analyst
Rahul Jain — Analyst
Deepak — Analyst
Presentation:
Operator
Ladies and gentlemen, good day, and welcome to the NIIT Learning Systems Limited Q2 FY ’25 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Vijay Thadani, Vice-Chairman and MD. Thank you, and over to you, sir.
Vijay Thadani — Vice Chairman and Managing Director
Thank you. Good afternoon, everyone who’s been able to join this call. Truly appreciate your joining us in this busy results season and also thank you for your continuing interest in NIIT Learning Systems Limited. We want to cover today an update on our second quarter of the financial year ending in March ’25. The second quarter from July to September, performance of the company as well as the outlook for the business as we go forward.
As a backdrop, I would only make one statement and then I’ll hand it over to my colleague, Sapnesh. It’s a very interesting situation where the economic indicators are all showing positivity, but the sentiments with our customers are on a weaker side and I think some of that has impacted our performance in this quarter as well. So, we’ll talk more about that.
I have with me Mr. R. S. Pawar, the Chairman of the company; Sapnesh Lalla, the CEO; Sanjay Mal, who’s the CFO and other members, senior members from our finance and Kapil Saurabh, who looks after Investor Relations and M&A activity. They are joining us and we’ll all be hopefully be able to answer most of your questions. Without further ado, I would like to hand you over to Sapnesh Lalla for an initial briefing and then we can get into Q&A.
Sapnesh Lalla — Chief Executive Officer and Executive Director
Thanks, Vijay, and thanks everyone for joining. In our prepared comments, I will review the financial numbers representing the performance for the second quarter as well as provide color on our expectations going forward. Our revenue stood at INR3,974 million. It was up 4% year-on-year. It was up 4% year-on-year in constant currency terms as well. The revenue, however, was down 2% quarter-on-quarter.
The second quarter generally sees low volume compared to Q1. We are a training business and that tends to be a full contact sport. The holiday period in Europe results into lower training activity and volumes. While we expected to see sequential growth in the second quarter in spite of the summer vacations that several of our European customers face, we did expect sequential growth in Q2 this year driven by addition of new customers as well as ramp up of customers that we had already acquired. We had also started seeing some green shoots and that’s the reason why we thought that we will see a quarter-on-quarter growth in Q2 when we completed Q1.
However, as I mentioned earlier, our revenue on a quarter-on-quarter basis is down 2%. While the business continues to see strong customer additions as well as marginal pickup in a few sectors, the fact is that we saw robust improvement in revenue visibility. We added two new customers this quarter. However, the volume is down quarter-on-quarter primarily due to lower than-expected spending by management, consulting and professional services firms who are some of our large customers as well as lower volume in the North American real estate business.
We continue to expect acceleration in the second half of this year on a sequential basis due to new customer additions, including the impact of a large customer ramp-up where the customer — we acquired that customer in the previous quarter. The year-on-year acceleration, however, is now expected to be pushed by a quarter. So what we were expecting to start in Q2 is likely to start in Q3 and take a — gather pace in Q4. Our EBITDA was at INR936 million, which was up 3% year-on-year and down 9% Q-o-Q. EBITDA margin was at 24%, was down 27 basis points year-on-year. Please note that the wage increments this year were effective July 1st as compared to being effective 1st of August last year.
The impact of these increments and impact of lower revenue was partially compensated by continuing improvement in productivity that we saw this past quarter. The depreciation was INR153 million. The net other expenses were INR38 million versus INR72 million in the last quarter and INR66 million in the same quarter last year.
Treasury-related income was INR117 million versus INR82 million last quarter. Acquisition-related expenses were INR91 million versus INR88 million last quarter. Demerger-related non-operating and transitionary expenses were at INR7 million. Other expenses of INR57 million, including a loss — foreign exchange loss of INR40 million and net other miscellaneous expenses of INR17 million. This is as compared to INR53 million in the previous quarter.
Tax was at INR175 million. The effective tax rate has been higher-than-normal for the company as consolidated P&L includes impact of certain notional P&L charges not admissible to tax. However, the tax rate was lower in Q2 due to reduction in long-term capital gains, taxes on income from debt mutual funds. We expect the tax rate for the full-year to be around 27% to 28%.
The PAT for Q2 was INR570 million, which was up 22% year-on-year versus INR469 million in Q2 last year. The EPS is at INR4.2 per share versus INR3.5 in Q2 last year, up 21% year-on-year. Over the last two years, as we have mentioned in the past, the business has seen — has been resilient in the face of heightened uncertainty. And while we expected the uncertainty to start settling down, it has not settled down as yet. While we face significant uncertainty, the business has improved margins. The growth predominantly has been driven by ramp-up of new customers and improving wallet share from existing customers.
Even as consumption continues to compress, and this quarter we saw sharp compression across management consulting and professional services firms, we are seeing some green shoots in select customers. Banking and life sciences are leading year-on-year growth, while tech as a segment is starting to see recovery for us.
As we have discussed, the Company is continuing to create new outsourcing opportunities driven by investments in new capabilities. However, continuing uncertainty and therefore pressure to cut costs across our industries is coming in the way of growth. During the quarter, we added two new MTS customers, one and top five FMCG leader and the second top 10 energy company. In addition, we renewed four contracts and we had one scope expansion. The company continues to maintain a track record of 100% renewals, reflecting continuous improvement in our long-term competitive position. Our visibility stood at INR368 million. This was up from INR350 million previous quarter. The number of MTS customers now is at 91.
While our customers have seen a disproportionate focus on costs and that is resulting in lower consumption with our existing customers, this disproportionate focus on costs is starting to create an acceleration in outsourcing opportunities for us. With our investments in sales and marketing and consulting and advisory services and a reputation as a trusted and reliable market leader, we believe we have an opportunity to gain a larger share of the upcoming opportunities and to accelerate growth.
The deal pipeline continues to be strong, including large outsourcing deals across different market segments, including technology, professional services, automotive, among others. The business continues to win a significant number of awards. We earned 63 Brandon Hall Awards, along with our customers, including 31 Gold Awards. NIIT MTS was accredited Gold Standard for the ninth consecutive year by the Learning and Performance Institute, and it was named to the training industry’s top 20 experiential learning companies for the fourth consecutive year. The balance sheet and cash flow metrics remain strong. DSO stood at 50 days as compared to 55 days last quarter and 46 last year.
Cash at INR7,370 million, and do note that we paid out the dividend and annual variable compensation during this past quarter. The CapEx for the quarter was at INR118 million. The cash flows continue to remain strong, free cash flow of INR3,078 million over the last 12 months. The Company ended Q2 with 2,323 employees. This was down 35 quarter on quarter and down 145 year-on-year. As has been our trend, we continue to make disproportionate investments in creating new capabilities and in sales and marketing, continue to invest in use of generative AI as it gains prominence in our customer conversations through, even though there is still hesitancy to adopt GenAI based learning solutions enterprise wide.
We continue to make rapid progress in leveraging AI across multiple aspects of our work, both to gain productivity improvements as well as to make more effective learning solutions for us. In projects and work streams where we are using AI, we are becoming significantly more ambitious in terms of learning outcomes for our customers, and are also starting to see meaningful improvement in efficiency. I would like to reiterate that rapid transformation in the industries we serve, going through digital transformation, decarbonization, acceleration in biopharma, as well as AI present a significant opportunity for us.
We see a number of organizations transforming and restructuring to improve their cost structure and achieve higher variability in their cost structure. We are starting to see acceleration in outsourcing opportunities going to this trend, and feel that we are uniquely positioned to take advantage of these and continue to lead the industry in terms of growth and profitability, specifically as some of our competitors are distracted at this time.
We also have an active pipeline of inorganic opportunities that we are pursuing and we’ll report more on this as we move forward with any of them. We continue to see robust contract pipeline and ramp up in new customers. However, our revenue this quarter is lower than expected, primarily due to reduction in consumption levels in the management, consulting, and professional services segment, as well as the real estate business in North America. As a result, while we expect strong sequential Q-o-Q growth in Q3 and Q4 on the back of new customer ramp ups, including ramp up of a large deal that we signed in Q1, our Y-o-Y acceleration is delayed by a quarter.
Consequently, for the full year, we expect to grow at 7% plus in constant currency terms, versus an earlier expectation of growing between 12% and 14% on a year-on-year basis. The margins are expected to be at the higher end of the guided range of 22% to 24% for the full year. With that, I did want to close by saying that if you look across most of our business metrics, we continue to be executing robustly. We’ve seen a small hiccup given the environment and we expect that we will be able to get past this hiccup as new customer ramp ups start to take momentum. Thanks, and back to you, Vijay.
Vijay Thadani — Vice Chairman and Managing Director
Thank you, Sapnesh. I, at this point of time, have nothing to add. I wanted to give maximum time for everybody to ask questions. So, operator, can you please open it up for Q&A?
Questions and Answers:
Operator
Sure. Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Pranay Roop Chatterjee from Burman Capital. Please go ahead.
Pranay Roop Chatterjee
Hi, thank you. Am I audible?
Vijay Thadani
Yes.
Pranay Roop Chatterjee
Great. Thanks for giving me the opportunity. My first question is on the headcount, right? See, usually given your employee-driven organization, usually in similar businesses, we track the headcount to understand the traction or immediate short-term traction. But what I’ve been noticing over the last three, four quarters is that the revenue per employee, if at all that makes sense is actually going up because your revenue is increasing gradually quarter-on-quarter, but your employees are going down.
So, I just want to understand this in a twofold manner. One, why is it going down? Are you like trying to optimize your business? And hence, it will remain at a lower level versus before and eventually there would come a time when the headcount will start increasing in line with revenue or how should we look at the headcount figure vis-a-vis your revenues?
Vijay Thadani
No, we are a technology-enabled business and we have continued to increase our investment in technologies that improve growth, the efficiency of what we do as well as effectiveness of how we teach. And in line with that, given that growth has been marginal or mid-single digits or so, it is logical to see a year-on-year reduction in the overall number of employees. Like you pointed out, as we see improvements in productivity or revenue per FTE or revenue per employee starts to go up.
Pranay Roop Chatterjee
So my question was more around then eventually when things normalize, let’s say you see growth coming back in Q4, would this headcount then start increasing in tandem with revenue or how should we then — should we look out for the headcount number as a key KPI? Because right now it’s not in tandem, right? And hence the question.
Vijay Thadani
Yeah, I mean, we will continue to make investments to improve efficiency. However, as we get into double-digit growth, we will see some improvement or some increase in overall headcount as well.
Pranay Roop Chatterjee
Got it. My second question [Speech Overlap]
Vijay Thadani
Continuation of that.
Pranay Roop Chatterjee
Right. Yeah, sure.
Vijay Thadani
Continuation of that, you should not consider headcount as a lead indicator for a short-term performance improvement because there are many forces at work.
Pranay Roop Chatterjee
Okay. Fair enough. Got it. Okay. My second question is on your sector-wise performance. So there has been an uptick in BFSI and tech and telecom on a quarter-on-quarter basis. Tech and telecom, so my question is, is this a trend more like a one-off or is this going to continue because of ramp — so ramp-up that is already happening specific to these two sectors?
And hence, linked to this, you had mentioned that you expect second half to accelerate. So if I look at last year’s trend, right, Q2 was a weak quarter and then Q3 and Q4 saw about 2% quarter-on-quarter growth. So if we have a similar 2% quarter-on-quarter growth this year, then we’ll end-up FY ’25 with about 5% growth. So is this a fair number to deal with or do you expect it to be faster for some reason? Just your thoughts on the same.
Vijay Thadani
No, you asked a number of questions. So if I miss any, do remind me. First on growth, we expect our [Technical Issues]
Sapnesh Lalla
Hello?
Operator
One moment. Members of the management, we can’t hear you. Participants, please stay connected while we reconnect the management. Participants, please stay connected while we wait for the management to join back. Ladies and gentlemen…
Sapnesh Lalla
Rio, we can reconnect.
Operator
Yes, sir, we are connected to the call. Mr. Chatterjee, please go ahead.
Pranay Roop Chatterjee
Sir, you…
Sapnesh Lalla
And I’m not sure when we got disconnected, but the person who was…
Pranay Roop Chatterjee
Sir, after — right after I asked the question and you said I had multiple questions, there we got disconnected.
Sapnesh Lalla
Okay. All right. So let me repeat my answers. I think the first part was about growth in the second half of the year. We expect that for the whole year, we will deliver growth of 7% plus percent. And for the third quarter, that growth would be about mid-single-digits on a Y-o-Y basis and that would accelerate to double-digit growth on a Y-o-Y basis in Q4. I think your second question was related to how are we looking at BFSI as well as tech as a vertical?
Pranay Roop Chatterjee
Right.
Sapnesh Lalla
So for tech, we have seen compression over the last two or three quarters and now we are starting to see recovery and we believe that this recovery will catch momentum over the next couple of quarters. BFSI has been strong for us over the last few quarters on the back of our ramp-ups with our existing customers as well as addition of new customers. We have a strong pipeline of new additions in BFSI and we expect the momentum to continue in BFSI.
Pranay Roop Chatterjee
Got it. Thank you, sir. I’ll get back in the queue. Thanks.
Sapnesh Lalla
Thank you.
Operator
Thank you. Next question is from Siddhant Dand from Goodwill. Please go ahead.
Siddhant Dand
Yeah, hi. I was just seeing that our cash flows have remained very good, that’s the nature of the business. It has been a cash pile up. So could we have — could we understand why the dividend rate continues to be so low? And just like other IT companies, why don’t we have a higher dividend rate because anyway the cash flows for acquisitions and we have a large bank balance.
Vijay Thadani
Sorry, what is the — the question is about dividends, the cash [Speech Overlap]
Sapnesh Lalla
Dividends or just shareholder payout dividend.
Vijay Thadani
Oh, okay, all right. So I think I mentioned this before that as a company what we believe is that the company should have a consistent dividend-paying policy, which means it should pay dividend consistently irrespective of ups and downs in the business because many of our shareholders would like to see a consistent increase in this dividend income. And typically we don’t have wide swings unless there is a wide swing in the fortunes of the company itself. And in line with that is the way we have been giving dividends.
Now the strong cash that we have in the balance sheet, we have had in the past done buybacks and distributed money to the shareholders. But this time this cash which we are having and are creating is meant for the future expansion as well as the inorganic activity that is underway. Of course, we haven’t announced anything after St. Charles. St. Charles was the last acquisition. But we are on record in the past to have it said that we expect to make a number of acquisitions in the next three or four years.
Of course, the timing of that can only be decided on the basis of when the deal gets finalized. Even right now we are in conversation. And therefore, some of this money will definitely get utilized. So, I think we are deploying our capital in line with our stated objective. The second thing which I would like to say is there is a great opportunity facing the learning industry because of the way learning is going to get transformed with introduction of AI and generative AI.
And I think this is an area where the company has already taken a very strong position internally, I call it the whole position when we compare ourselves with our contemporaries. And we think that this is an area — a significant area of investment which the company will make. The results will not commensurate immediately with the investment that we make. And to that extent, there will be a dent on the cash flows. I think these are the two events for which we are preparing and I think both of them will serve the company and the shareholders very well.
Sapnesh Lalla
One other thing I might add, which is that most of our customers tend to be the top 5 or 10 of their categories. And when they look at choosing a partner, they like to work with partners who have strong balance sheet. So having a strong balance sheet is certainly a plus when we are in a competitive situation.
Siddhant Dand
Yeah. Okay. Just one more question. In the exceptional items, there is legal professional and other strategic initiative expense. So is it the M&A expenses that we are working on acquisitions and spending those?
Vijay Thadani
Yeah, so I think as we continue to scan around and prepare strategies for inorganic activity, we do spend moneys on getting the right advice and doing the right study. And I think that is an expense which is getting incurred as we speak.
Siddhant Dand
Okay. Thank you.
Vijay Thadani
And if you notice, it was there last quarter.
Siddhant Dand
Yeah, correct. So this is — would you say this is one time in nature or would be repetitive for a few quarters?
Vijay Thadani
I don’t think these are — I mean, you get a study done or you get some research done. It has a starting point, it has an ending point, so —
Siddhant Dand
Okay. Perfect. Thank you.
Operator
Thank you. [Speech Overlap]
Vijay Thadani
And it’s not only for inorganic, it’s also for organic growth. So these are a number of studies that you continue to do.
Siddhant Dand
Okay. Thank you.
Operator
Thank you. The next question is from Vimal Jamnadas Gohil from Alchemy Capital Management. Please go ahead. Vimal Jamnadas Gohil, you may go ahead with your question.
Vijay Thadani
We can come back.
Operator
Right. We’ll move to the next question as there is no response from the line of Mr Gohil. The next question is from Jinal Seth from Auriga Capital Advisors. Please go ahead.
Jinal Seth
Yeah. Hi, good afternoon. Am I audible?
Vijay Thadani
Yeah.
Jinal Seth
Yes, okay. So the first question is that when you set your expectations strong guidance of growth, what are the key indicators or the interactions with clients, which base your growth or guidance on? And I’m asking this because we have cut guidance by half. So going forward, how confident are you that this guidance will be delivered?
Sapnesh Lalla
As you might expect, we do have conversations with customers. We have conversations with customers often. However, the level of uncertainty across some of our customers ended up being higher than what we had expected. Some of our professional services firms have their year-end in the May-June time frame. We expected their new budgets to open up. So we did have indication that the new budgets would be down 10% to 15%.
However, as they opened up, they opened up a little bit late. But more importantly, they were down more than what they had indicated earlier. Maybe they’re keeping it for the later quarters. But what opened up was lower than the 10% to 15% down expectation that we had received. Second, like I pointed out earlier, our North American real estate business was hurt by not enough in terms of lowering of interest rates and the real estate market continues to be tough. And given that, we did not see the bump up that we were expecting to see post the July holiday in Canada.
Jinal Seth
Okay. I mean, just a continuation for my second question is that over the next three to four-year framework, what growth trends do you believe that this business model can deliver assuming normalization of the environment?
Sapnesh Lalla
See, I would say two things. The typical growth trends that you can expect are in the 20% range. Those are growth trends that we have seen in the past and I think we are able to generate those same growth trends going-forward as well. There is, however, an area that I wanted to mention and focus on. Specifically, whenever markets go through deepening uncertainty, there is significant pressure on costs and the compression in spends that you saw that have affected this quarter were a product of that. But what we also see is that that same pressure on cost and desire to transform to a lower-cost basis as well as increased variability results into acceleration in outsourcing and we are starting to see this phenomena.
Our pipeline is stronger than it has been. We are also starting to see multiple large opportunities in our pipeline, which we have not seen in the past. In the past, we have seen one or two large opportunities in the pipeline. At this point, we have multiple. And I think it’s — because of the sustained uncertainty in the market and the desire to take cost-out and achieve higher variability. I think given our market position, we are positioned very well to gain a large share of these opportunities and that has the potential of accelerating our growth rates over the next couple of years and then those growth rates will continue to normalize towards 20%.
Jinal Seth
Just to clarify, when you mentioned 20%, we’re talking about organic?
Sapnesh Lalla
Yes.
Jinal Seth
Okay. Thank you and good luck.
Operator
Thank you. Next question is from Ganesh Shetty, who’s an Individual Investor. Please go ahead.
Ganesh Shetty
Thank you, sir, for the opportunity. Just I have one question regarding our new energy initiatives and any client acquisition in this field? And how this particular sector is like progressing as it is a new one? Can you please explain? Thank you very much.
Vijay Thadani
I’ll reiterate the question that Vinesh asked, you wanted to know the progress in the new energy or renewable energy sector. It’s been about a year since we made a minority investment in an entity called InnoEnergy, who is a significant investor in renewable energy companies in Europe. We believe that we have a strong partnership with them. Through them, we are able to get into large opportunities that can help us acquire new and large customers. In the last one year, we’ve been able to acquire one significant-sized customer through that relationship and we expect that we will be able to add more customers through the relationship that we built with InnoEnergy.
Jinal Seth
Thank you very much, sir. All the best.
Sapnesh Lalla
Thank you.
Operator
Thank you. Next question is from Raaj from Arjav Partners. Please go ahead.
Raaj
Hello, am I audible?
Sapnesh Lalla
Yes.
Raaj
I just skipped a part on the guidance which you gave. So, for FY ’25, are we expected to grow around 12% to 14% range? Am I right?
Sapnesh Lalla
Our initial guidance when we started FY ’25 was to expect a growth of 12% to 14% year-on-year. We have revised that guidance to 7% plus at this time.
Raaj
All right. And for FY ’26 onward, you are expecting around 20% growth for the next three to four years on a CAGR basis?
Sapnesh Lalla
From a long-term perspective, we are expecting 20% plus growth. Of course, it will ramp up to 20% over the next few quarters.
Raaj
Next few quarters. All right. And sir, currently, how much is our outstanding pipeline?
Sapnesh Lalla
We don’t disclose the total value of our pipeline, but our visibility, which is an indicator of the contracts that we have in place at this time is INR368 million. It’s up from INR350 million last quarter.
Raaj
Understood. So for FY ’26, will it be a better year than FY ’25? Do you have a visibility over there?
Sapnesh Lalla
We expect that FY ’26 will be a stronger year in terms of growth as compared to FY ’25. At this point in time, we haven’t exactly figured out what specific growth we will see, but we do expect it to be higher-growth last year as compared to the current year.
Raaj
Okay. And are we also actively looking at acquisition?
Sapnesh Lalla
Yes, indeed, we are.
Raaj
All right. And are we expected [Speech Overlap] as investors, can we expect an announcement on the acquisitions by FY ’25 end?
Sapnesh Lalla
As soon as we have one, we will let you know.
Raaj
All right. Okay. All the best.
Sapnesh Lalla
Thank you.
Operator
Thank you. Next question is from Harsh Chaurasia from Vallum Capital. Please go ahead.
Vimal Gohil
Hello?
Operator
We seem to have lost the line for Mr. Chaurasia. We move to the next question. Next question is from Mythili Balakrishnan from Alchemy Capital Management. Please go ahead.
Vimal Gohil
Yes, sir. Thank you for the opportunity. This is Vimal Gohil. I hope I’m audible at this time.
Vijay Thadani
I can’t hear you. [Speech Overlap]
Vimal Gohil
Yeah. Is it better now?
Vijay Thadani
Yeah, it is better.
Vimal Gohil
Yeah. Thank you, sir. Sir, so we’ve moved down our guidance from 12% to 14% to 7% or 7% plus. I just wanted to understand the nature of the confidence that we have that we will achieve that 7% with two quarters to go. Is it that our verticals which haven’t really fired in the last couple of quarters, which is management consulting and aviation/aerospace, will those be bouncing back or will it be the current set of verticals which are performing will continue to perform?
Sapnesh Lalla
Yeah, our relationships with our customers continue to be strong. We have some customers who are spending with us. We have a large customer who is in ramp-up and we’ll start to see a pickup because of that customer starting Q3. So we have reasonable confidence that we will be able to achieve the goal, though I would say that the environment has been uncertain. In fact, even towards the end of the first month of Q2, we were reasonably confident of achieving the guidance that we had provided and then suddenly things changed with some of our customer segments. So the uncertainty is high. However, we are reasonably confident of achieving the guidance that we have provided.
Vimal Gohil
Great. Sir, a very good job in the margins despite the softness that we’ve seen on the revenues. However, this has come on the back — I mean, one of the levers, of course, has been that we have seen a headcount reduction. But as we inch up towards that 20% growth, we will have to add more headcount. In that scenario, will we be able to defend margins? And, of course, will we be able to see operating leverage play out and improve margins from here on? Or at least keep the margin steady at these levels despite headcount addition?
Sapnesh Lalla
See, we — I was saying this to a previous question, we are a highly tech-enabled business and we continue to invest a lot in technology, so that we are able to improve the efficiency of our business as well as we are able to make more effective learning solutions for our customers. And this investment in driving efficiencies helps with improved productivity and therefore when we are in marginal growth environment, we end up having fewer additions in headcount or at times reduction in headcount. And that’s what you’ve seen from a year-on-year perspective for us. As growth comes back or as more robust growth comes back, we will see some additions, but we will continue to invest in technology so that we continue to be more efficient as we look ahead.
Vimal Gohil
All right, sir. Thank you so much and all the very best.
Sapnesh Lalla
Thank you.
Operator
Thank you. Next question is from Pratap Maliwal from Mount Intra Finance. Please go ahead.
Pratap Maliwal
Hello, am I audible?
Vijay Thadani
Yes.
Pratap Maliwal
Hi, and thanks for taking my question. So as I noticed that we’ve had a sharp contraction in our management consulting and professional services vertical, so can you just help me understand why this particular vertical has contracted more than the rest? Because I believe they are key developments. So could you just help me understand why we’ve seen such a big contraction here?
Sapnesh Lalla
See, while not getting into specific customers, you would have noticed that the large professional services companies like the Big Four have actually lowered headcount over the last several quarters. With our relationships, we had held up the value of training that was being delivered and their consumption till recently was strong. However, over the last few months, there has been significant cost pressure as they have seen declining growths. And given that they are run as partnerships, they want to ensure that they maintain margin and therefore lower their variable costs. And we got hit because of that.
Pratap Maliwal
Understood, sir. As you said that some of them had year-end closures were on May-June part and the budgets as they opened up, they opened up even lower than perhaps what we were expecting or what was indicated to us. So is it that maybe over the next two, three quarters, it will be — this particular vertical will be under pressure?
Sapnesh Lalla
We do expect this vertical to be under pressure for the October, November, December quarter. We expect that some of the thawing will take place, so we’ll see some sequential growth in Q4. And then as we start looking at the New Year’s budget, we think that by then some of the uncertainty would have settled and they’ll start — and we’ll start seeing growth.
Pratap Maliwal
Okay. Thank you for taking my questions and best of luck for the time coming.
Sapnesh Lalla
Thank you.
Operator
Thank you. Next question is from Ankur Shah from Quasar Capital. Please go ahead.
Ankur Shah
Yeah, hi, sir. Thanks for taking my question. Sir, can you share some insights on how a client contract expansion happens? When you say scope of expansion growth, what does it mean? What is the progression? Can you throw some light on that? And also the discretionary nature of this expansion, like let’s say, if a particular plant is facing a slowdown, is it the first thing which is going to be cut, like, just to get more insight into the business model?
Sapnesh Lalla
Sure. I’m trying to answer your first question first, which is what are the dimensions for scope expansion. Most of our customers are large multinational corporations. And when we start working with them, most of them start by outsourcing an aspect of what they do to us. Very, very few outsource everything to us in the — in one go. Most of them outsource parts of what they do to us. Sometimes that part might be a geography. And in that case, a scope expansion might mean that we added a new geography. For example, we might start in EMEA and then add North America as a geography, which results into scope expansion.
There are other times when an aspect of training might be outsourced first. For example, learning content creation might be outsourced. And then as we do good work for those customers, they might expand the scope to add facilitation services or learning delivery or add different parts of what we do. So the expansion comes in multiple dimensions, whether it is geographic or it is by practice or sometimes an organization sees a significant ramp up in the volume, for example, a couple of our aviation customers saw a lot of expansion as they came out of COVID and restarted their production.
So expansion comes in multiple hues. And our goal, of course, is to find new revenue sources with each of our customers as well as be able to do more based on the good work that we do for them today. The expansion comes over years. So we typically follow a strategy of land. So, when we acquire a customer, we focus the first year on ensuring that we provide good services on what they have contracted so that we are able to retain them and then in the second or third year, we start looking at expansions.
Ankur Shah
Sure. And sir the second question?
Sapnesh Lalla
Say the second question, again.
Ankur Shah
Yeah. So when a contract gets expanded or the work which gets expanded, what is the level of discretion which the customer has on this, like let’s say, if there is a slowdown of the…
Sapnesh Lalla
Yeah, what is the extent of discretionary spend?
Ankur Shah
Yeah.
Sapnesh Lalla
I think if you think of training, 100% of training sits as a discretionary expense on our customers’ P&L, which means that if you stop screening today, not a lot will change as far as the customer is concerned in the short-term. So, it can be switched off. However, the way we have chosen the customer verticals where we have chosen to work or chosen to penetrate, those verticals are verticals which are either highly regulated or where the rate of change is very high.
So, for example, in BFSI or life sciences or aviation, these are all highly regulated markets. And therefore, our customers are obligated to do a lot of mandatory regulatory training and at times that is as high as 50% across those customers. While training is discretionary in nature, a fair part of it is mandatory in nature as well. There are other customers like technology and telecom where the rate of change of technology is rapid and therefore they have to change their own teams as well as their customers on exchanging technologies. And so while discretionary, it has a year-on-year opportunity.
Ankur Shah
So, sir, just to — like ask a supplementary question to this, considering the way the world is moving on technology on making things more productive with lesser number of employees, does our contract has any linkage to do with the headcount that the organization has? Like let’s say, if a organization is in a downward trajectory in terms of headcount, does that affect our revenue?
Sapnesh Lalla
So in some segments, it does. For example, if you think of professional services, that is a very headcount-oriented business where the professional services firms, as they are expanding, they invest a lot on training, those that they hired and they often hire early talent and that talent requires a lot of training. So there are parts of our customer base, which are highly connected with the number of employees and therefore the training.
But there is another part which is a significant cause of trading and that is the changes and the restructuring and the reorganization that happens. For example, if an organization is moving from fossil fuel to renewable energy, large numbers of people get trained. Or when there is significant change in role, for example, as banks start to become more digital, they end up doing a lot of training, even though they might not be increasing the number of employees.
Ankur Shah
Okay, sir. Got it. Thank you so much. All the best.
Sapnesh Lalla
Thank you.
Operator
Thank you. Next question is from Rahul Jain from Dolat Capital. Please go ahead.
Rahul Jain
Yeah. Hi, thanks for the opportunity. Of course, it will sound similar to our previous questions. What essentially I’m trying to understand is that this revised guidance, how it should appear from a — Q-o-Q trajectory perspective? You gave the idea that what the Y-o-Y may look like, but you don’t see any risk from a sequential basis upwards of 5% Q-o-Q growth. So, is it more like a shift of a timeline of a project that gives you that kind of a confidence on the second half of the year or is there something else?
Sapnesh Lalla
No, it is quite like what you pointed out. It’s like saying our trajectory has got shifted by a quarter.
Vijay Thadani
And line gets drawn at the end of the year…
Sapnesh Lalla
Yeah.
Vijay Thadani
We will be out in the quarter.
Sapnesh Lalla
Yeah.
Rahul Jain
Right. And this — essentially, the situation that we are in, how does it — of course, you have stated the medium-term prospect for the business, but how far we are from that cycle where you could gauge in your understanding that, okay, yes, we are seeing things going back to that point maybe a couple of quarters from here or you think we are already there because what would that essentially mean is that FY ’26 may not be that kind of a year again or you think it is too early to rule that out and we could still be racing for that 20% kind of a potential for next year?
Sapnesh Lalla
Yeah, I think like I pointed out earlier, we should get into reasonable double-digit growth in our Q4 and we think that it’s possible to sustain. And so like I was saying to an earlier caller, we feel that the growth — while we haven’t done all our computations, but we feel that our growth in FY ’26 would be stronger than it is likely to be from FY ’25.
Rahul Jain
I mean, the right way to say is that key, will it be better than what you were initially thinking of FY ’25? Because, of course, this is a much depleted base, we are sure you will do better than that.
Vijay Thadani
So there are two ways of looking at this what you called depleted guidance, yes, which is correct. The point is the line gets drawn on 31st March. So, if something has moved by one quarter, then it has moved by one quarter or one quarter is a placeholder. I mean, it’s a — by some amount, it has moved by some amount. Obviously, in the second half, there was an expectation of a much higher growth. See, because this was the year in which first two quarters were very slow, meant to be slow and the last two quarters were to show significant ramp-up. We can see the ramp-up coming, but the ramp-up is not coming at the rate at which we saw or at which we foresaw. But before we can take guidance on that, 31st March will happen. We have to say what will it be at the end of 31st March. If you add up that, then 12 to 14 and 7 plus obviously is what mathematically it will work out. And that’s why I think the right way which Sapnesh is trying to say is that it looks like the gold cost touch and shifted by a quarter.
Sapnesh Lalla
Yeah. Like I pointed out, we think we will have a reasonable mid-double-digit growth or reasonable double-digit growth in Q4. And if that persists, we would be ahead of — certainly reasonably ahead of the 7% that we are likely to deliver this year.
Rahul Jain
Yeah, sorry to go back to that last comment that you made, which is a reasonably high mid-double-digit, you mean to say like a teen or something?
Vijay Thadani
Yeah.
Rahul Jain
Okay. And from a profitability perspective, the way things have been shaping up, what are the puts and takes in your mind from a near-term perspective?
Vijay Thadani
Yeah. I think like I was saying to an earlier caller, we continue to invest to improve efficiencies that results into higher productivity. We are a services business, so our business is dependent on people. So I think on one side, we will have — as we grow, we will add headcount. And on the other hand, we will have improved productivity. In all of this, there is — one of the reasons why customers are likely to accelerate outsourcing is the fact that they want to do a cost takeout. And I think cost is going to be high on the customers’ mind. Our investments in improving productivity will enable us to retain margins at the levels we currently have in spite of helping our customers take cost out.
Rahul Jain
Right. That’s it from my side. Thank you so much.
Sapnesh Lalla
Thank you.
Operator
Thank you. [Operator Instructions] Next question is from Deepak from Sundaram Mutual Fund. Please go ahead.
Deepak
Yeah, thanks for the opportunity. Sir, I had one question. So you have already pointed out the reason for sequential decline was slowdown in real estate market and consulting revenue not coming through. But if I look at your sector bifurcation, even your life sciences and aviation sector has shown an Q-o-Q decline of around 9% to 12%. So just wanted to understand that what is happening in these two vertical because we were fairly sounding optimistic in the previous two quarters.
Sapnesh Lalla
I mean, if you be reading the newspapers, you would know what’s happening in aviation. And while we work with some of the two of the largest manufacturing — manufacturers of airplanes, there is a reason for a slowdown from an aviation perspective. And what you’re reading in the newspapers is what is causing, the Q-o-Q slowdown that you saw.
I think life sciences has been robust. It grew very significantly from a year-on-year perspective. It has been very robust and so marginal up-and-down, I won’t get too concerned about it, but it’s just seasonality with respect to the holiday or the vacation time that most organizations have with respect to the summer. So, life sciences is not what I would get too worried about, but from an aviation perspective, what’s in the news is affecting us.
Deepak
Okay. Thank you so much, sir.
Operator
Thank you very much. That was the last question in queue. I would now like to hand the conference back to the management team for closing comments.
Vijay Thadani
Yeah. Thank you very much once again for your very insightful questions. As often I find them very educative because they need to think and come up with the strategies to overcome the situation we are in. We also appreciate your understanding of where we are and why we are. I’m sure there were many more questions and many more follow up questions that you may have. Kapil Saurabh and team will be available and so are all of us and we’ll be happy to answer those questions.
And once again repeating that on 29th, we are likely to be available for further discussions. And in that case, if there are any opportunities for you to have a face-to-face meeting, please do get in touch with Kapil Saurabh. We will be happy to augment a meeting there. I do want to say that the deal pipeline as well as the contract order book that we have is very robust and strong. Our win rates continue to remain very high. Our renewal rates are 100%. And I think we are very confident of being back on the track, even despite the small setback that we had. So with that, I would like to close this session and thank you once again for giving your time to us and for your valuable guidance through this discussion. Operator, we can close this call.
Operator
[Operator Closing Remarks]